Takeaways from Exencial’s ESG Study

August 21, 2020

We have seen an increase in client inquiries over the last few years surrounding environmental, social and governance (ESG) investing.1 This is being driven, at least in part, by an uptick in media coverage and research touting ESG investments.2

As more and more ESG-related investment products have debuted, we decided to conduct a brief internal study to see how many of these funds are available and how they’ve performed.


Before we dive into the results of the study, here are a few key notes to consider:

1. There are no industry standards for defining and scoring ESG. While there are some better-known methodologies that investors and asset managers use as a benchmark (such as MSCI) there is not a clear industry standard for criteria and scoring. A primary concern to one ESG investor may not be important to another. This creates some challenges in identifying which funds to classify as ESG strategies, not to mention how the ESG strategies are executed.

2. There are relatively few ESG funds, fewer with a five-year history. While more ESG strategies have come to market recently, few have the kind of history that would allow for a meaningful study. Using the Morningstar database of ESG-related funds, we identified 120 U.S. large company ESG funds with at least a five-year record. 3 Other asset classes, such as small companies or international stocks, had far fewer strategy options. For this reason, we confined our study to the U.S. large cap space.


There were two surprising results from this study. First, we initially hypothesized that ESG methodologies and scoring would favor technology firms and that ESG strategies would therefore be overweighted in technology sector holdings. Technology’s surge over the last few years4 would therefore explain why there have been so many recent articles about ESG investing.

What we found, however, was that ESG funds had no greater weight on average to technology names than their broad market peers – about 25% of the S&P 500 index is technology, for example.5 While some funds did have overweights, just as many had underweights.

Secondly, we could not see any distinct outperformance of ESG funds, to which many articles had alluded. On average, we saw that ESG strategies underperformed when compared against their broad market benchmarks, as seen in the chart below.

Essentially, strategies that overweighted tech tended to have better-than-average performance and those that underweighted tech tended to have lower-than-average performance. However, the funds on average underperformed broad market benchmarks.


Our study is not meant to dissuade investors from utilizing ESG strategies. We believe there are some ESG metrics that very well may lead to better outcomes for investors, such as favoring those companies with greater transparency in reporting (governance). We have recommended ESG funds and strategies (such as the Exencial SELECT stock strategy that incorporates several ESG metrics) that our clients can utilize.

We did not find a record of ESG fund outperformance within the Morningstar set we studied. However, the impact of ESG investing on markets and prices will almost certainly grow in coming years. We will continue to closely monitor developments in this space and determine how ESG metrics may affect our portfolios.

If you have any questions about investing in ESG, please contact your Exencial advisor.

1. Investopedia (2/25/20) – Environmental, social, and governance (ESG) criteria
2. Morningstar (4/16/20) – U.S. ESG funds outperformed conventional funds in 2019
3. Exencial Wealth Advisors (8/20/2020) – Internal Study
4. Zacks Investment Research (5/19/20) – Tech sector outperforming this year: Best ETFs, stocks
5. The Balance (5/28/20) – What is the weighting of the S&P 500?

The S&P 500® is widely regarded as the best single gauge of large-cap U.S. equities. There is over USD 9.9 trillion indexed or benchmarked to the index, with indexed assets comprising approximately USD 3.4 trillion of this total. The index includes 500 leading companies and covers approximately 80% of available market capitalization.

The Russell 1000® Growth Index measures the performance of the large- cap growth segment of the U.S. equity universe. It includes those Russell 1000® companies with higher price-to-book ratios and higher forecasted growth values. The Russell 1000® Growth Index is constructed to provide a comprehensive and unbiased barometer for the large-cap growth segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect growth characteristics.

The Russell 1000® Value Index measures the performance of the large- cap value segment of the U.S. equity universe. It includes those Russell 1000® companies with lower price-to-book ratios and lower expected growth values. The Russell 1000® Value Index is constructed to provide a comprehensive and unbiased barometer for the large-cap value segment. The index is completely reconstituted annually to ensure new and growing equities are included and that the represented companies continue to reflect value characteristics.

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